Tropical Deforestation: Markets and Market Failures

This paper puts forth a joint project model to examine tropical deforestation. Activities to curb deforestation yield private goods, local (country-specific) public goods, and global public goods. Local public goods are private among countries, but public within the country. Markets can operate with respect to the private goods, while nations are motivated to strike bargains with one another with respect to the country-specific public goods. Suboptimality stems from the global public goods and the positive externalities that preservation activities of one country confer on another. This suboptimality can be attenuated if the developed countries establish property rights to genetic material from the rainforests. Much can be done to promote allocative efficiency and these actions should be accomplished prior to the institution of the supranational linkage. Since the bulk of the global public benefits are derived by the developed countries, they are in a weak bargaining position with respect to the shrinking rainforests. An early agreement is in their interests even if the bargain favors the tropical countries.